June 06, 2016

Then and Now in Retirement: Health Insurance

A reader recently asked me to address the issue of health insurance and how the experience obtaining health insurance in retirement compares to when I first retired.

Then

As I mentioned in a recent post, travel was the thing I was most excited about when I retired. The thing I was least excited about, or should I say most worried about, was getting health insurance. I was even more worried about that than money in general. With money, you can make adjustments to limit your risk—cut back on expenses, take on a part-time job, downsize your house. Without health insurance, the downside risk could be bankrupting. Without health insurance, no amount of money can make you feel secure. That reality was even more scary to me than having to weather a tumultuous stock market.

Back in 2008 when I retired, the only guaranteed insurance for a retiree younger than 65 was to continue under your employer’s plan under COBRA. Outside of that, insurance companies could turn you down for any reason. And once you had insurance changing plans might be impossible. So if your network changed, you could just be out of luck.

I wrote a post about our dilemma here. COBRA was insanely expensive when I retired, and the insurance broker I was working with told us that no insurance company would cover us because Doug was on three medications (one of which was only for allergies!) I had to do a lot of digging on my own, but eventually I was able to find a policy outside of COBRA that cost a lot less. But it was our ONLY alternative. And I was always worried about the possibility of getting dropped for some reason, if we ever got really sick.

Now

The good news is that anyone can buy insurance now, irrespective of your health issues, irrespective of the number of medications you are taking. So at least you know that you will be able to limit the unlimited downside of not having insurance. That peace of mind is most important to me.

This peace of mind does not come cheap however. We now pay double the premiums we used to pay. The insurance covers more, but I’m not a heavy user of health services anyway, so overall, we pay more. That’s a big downside for many people. While I would love to be paying less I don’t begrudge the changes. I know a lot of people do. But I think guaranteeing insurance to anyone willing to pay for it (and subsidizing insurance for those who truly cannot afford it) is a worthy achievement. So I don’t complain. To me it’s just like paying property taxes for the schools I don’t use because we never had children. It’s to the overall benefit of society, so I’m good with it.

Part of the reason my insurance is more expensive though, is that we selected a plan offered through one of the more expensive carriers because Doug and I really wanted to keep our own doctors. If we were willing to find new doctors, we could have saved significantly on our premiums. Kind of a get-what-you-pay-for issue.

My only complaint about the post-Affordable Care Act environment comes from my experience helping people enroll on the insurance exchange. There is what seems to be a significant hole right in the middle of the affordability scale. People who can afford to buy insurance are guaranteed to be able to get it, that’s great. People at the lowest income level can qualify for Medicaid coverage now (unless of course you live in one of the states that did not expand coverage, in which case you are part of another big hole.) And people on the lower end of the income spectrum are eligible for premium support tax credits on a sliding scale based on income.

But I worked with several people stuck right in the middle of all that. Their incomes were just high enough to disqualify them from premium assistance, yet the cost of insurance would be as high as a quarter of their take-home pay. These folks don’t owe the penalty for not having insurance, because the premiums would exceed 8% of their income. But that’s sorry comfort for a family that actually wants health insurance.

So if you retire before you reach Medicare age, you may take comfort in the fact that you can’t be turned down for coverage, but you should definitely run the numbers before you retire to make sure you can actually afford the coverage!

Or one could reduce income so that coverage is affordable. When one retires young, income is how much you earn from taxable accounts plus the draw from tax-deferred retirement accounts (using SEPP when under age 59½). And that draw from retirement accounts is adjustable. It isn't as if one is locked-in to a specific income because that's what one earns from a job. So, if one's income is too high to qualify for health insurance subsidies, lowering taxable income is a strategy to consider. One can even draw from a Roth IRA — subject to the usual Roth limitations — if extra non-taxable income is needed. And getting an HSA qualified plan would allow for the HSA contribution deduction. Well, you know this stuff better than I do, being a recovering accountant.

I guess I view things through the prism of a thrifty person who lives comfortably on very little. If someone's nest egg is so gigantic that the taxable income from it is necessarily large, I think that person could likely afford the big hit from health insurance. Others have the option of lowering taxable income to qualify for some or all of the subsidy. That's what I do.

dgpcolorado: All very good points! You have a lot more flexibility if you have a combination of Roth, non-Roth, and regular taxable accounts. If you are primarily relying on regular retirement accounts though, you might not have that flexibility, you just gotta withdraw what you need to live on, and that might very well exceed the limits.

For example a single 60-year old in my zip code who was counting on pulling out $48,000 per year to live on, BEFORE tax, would be paying $8,000 for the cheapest plan on our exchange (and wouldn't qualify for credits). That is almost 25% of their "take home pay." Of course they could lower their withdrawal and stay under the limit. But move up the income scale a little, and you're still in the bind and may not be able to cover all your expenses by withdrawing much less.

For working people who fall in this hole, though, this solution isn't very palatable.

Michelle: Contgratulations on your early retirement goals and thanks for the future post idea!

Syd, That 60 year old who wanted to pull out $48k could lower that somewhat and drop below the threshold for the subsidies for a time. We early retirees often talk about withdrawal strategies and one of them is to cut back when bear markets shrink one's portfolio, rather than continuing to draw the 4%, or whatever figure is being used. A similar strategy could be used for those pre-Medicare years: tighten up spending to reduce health insurance costs, as well as shift income source by drawing on taxable or Roth accounts. Once one hits the relatively fixed costs of Medicare plans, spending could tilt back toward tax-deferred accounts for the five and a half years until Required Minimum Distributions kick in.

It might not be ideal, but just putting a retirement draw plan on autopilot, given the current structure of the ACA (which I view as a huge improvement over what I had before) isn't the best approach either. In my eighteenth year of early retirement I'm still not to Medicare age, so I've been doing this stuff for a long time, as you know.

Of course, it may all be moot if Congress succeeds in killing the ACA — as they have tried so hard to do so many times — and we go back to the days of being excluded from insurance for preexisting conditions, facing lifetime caps, and the real possibility of being bankrupted by a health crisis. But, hey, at least the insurance was cheaper for those who could qualify for policies! No, thanks.

Hi Syd,
So, so, so happy that you're posting again. I can't tell you how much I appreciate your unique perspective on this topic. Thank you!

Here's my off-the-wall-"solution". Not for everyone, obviously, but I thought I'd share. I wanted to retire in the worst way, but I have had cancer and have a weird heart condition so had no chance in hell of getting affordable health insurance. This was in 2012. I couldn't stand the idea of waiting two more years for the ACA to kick in. A long-time acquaintance was a widower. I approached him with the idea of becoming "domestic partners" so I could get healthcare and travel the country in a small RV. He agreed and then shocked me again by saying that 1). He'd even marry me "on paper" if it would help and 2). His entire family pays no monthly premium for healthcare. I can't remember much after that, due to extreme shock. Anyway, we decided to go out to dinner to discuss it further. You guessed it, we fell madly, deeply in love and were married six months later. On paper and for real. Now, we joke that I married him for the healthcare and he married me for the... other benefits, lol! Oh yes, he also happened to own a small RV, which I did not know at the time. And I was 54 and had never been married. Who would have thunk?

I'm a fan of the Mr. Money Mustache Forum. There is a lot of information on this topic available there, so I'm offering this link. Hopefully, it will help someone who wants to retire early find affordable healthcare, particularly since my husband is no longer "available". Hee.

What great stories! I support all creative ways (that are legal!) to save money and to enjoy life to the fullest! The "love story" story is the best!!!! That said, Ken and I retired at age 60 in 2013. I think we had a few months where our old self pay insurance was still in effect then we were able to get onto the ACA (Obamacare) for a decent price since we were able to keep our taxable income within reason for a few years.We now have a plan I like a lot but United is pulling out of our area as of 2017.So who knows what lies ahead? What will be available next January and what it will cost? We will be 64 my mid- 2017, about 2 more years till medicare.It's an abomination that in the USA we cannot have access to REALLY affordable or even free care (we did pay plenty of taxes!!!!!!) .. we spend, as a country, so much money on so much else!! Our premiums would be outrageous if we took more income, but we're being careful till medicare time... we just returned from MEXICO, a 3 hour drive from Phoenix, where we were able to get affordable dentistry performed.So sad that our own country takes advantage of us in all these health care matters!!!!!

What a great topic and wonderful comments from your readers! My husband retired from his job (since I wasn't there long enough to officially retire, I guess I just quit) and is able to get health care for us under his company's retirement plan. It isn't cheap but I am grateful to have it. We are both very healthy so we don't use it very much but as a cancer survivor, I know that it CAN happen to me. The ACA was a godsend to many people and my feelings about it mirror yours almost exactly. Hopefully one of these days we can join the rest of the developed world and have universal healthcare coverage. I really do hope that, despite all of their bluster, the GOP will realize what a disaster they'd have on their hands if the got rid of the ACA without replacing it with something even better.

Syd, you are aware of my ER story but I'll post it again here, including the role health insurance had in my ER planning days and since that time.

Back in 2007, when my ER planning was on the rise (and I was still working, albeit part-time), I reduced my weekly hours worked from 20 to 12 making me ineligible for my company's group health plan. I protested strongly but to no avail. Instead, I went on COBRA but it would last for only 18 months until the end of 2008. But I knew in mid-2007 that I might very well be able to retire fully.

By mid-2008, I had found a reasonably affordable individual health plan even here in New York where premiums for individual plans are quite high and enrolled in it starting in 2009 shortly after I retired in late 2008 at age 45. I did have to give up dental coverage after COBRA expired but in those 18 months I had some expensive dental work done.

But the premiums for this plan jumped by 50% in the next 2 years and they ere beginning to strain my budget. However, in that time, the ACA had been passed (YAY!) and the exchanges would begin starting in January 2014. So I dumped the now expensive plan I had and opted for a bare-bones, hospital-only plan starting in mid-2011. I was healthy so as long as I could hang in there for another 2 1/2 years, I could then move to a broader ACA plan starting in 2014.

In late 2013, I enrolled in an ACA Silver plan for 2014 whose premiums were about the same as the COBRA plan I had in 2008. The premiums rose about 8% in 2015 although the company asked for about 14%.

I then became sick in the middle of 2015 and had to go to the hospital for about 2 weeks. I'm fine now while it was a costly time. But thanks to some good laws here in New York, I was not stuck with an inordinate amount of OOP expenses. I did hit the cap of $6,250, most of it going to the hospital. And all of the disputes I had with the insurance company and the hospital (and there were several) ended up in my favor. Still, it wasn't a very good plan, one that one of my doctors railed against.

The insurance company requested another 14% increase for 2016 so I dropped them for 2016 and found another plan which happens to have all the same doctors I began seeing in 2015 and costs a lot less. And its drug plan is very good, too (with a pleasant surprise when a drug which originally had a monthly copay saw that copay disappear).

My income is near the top to qualify for a federal subsidy, so that subsidy is rather small ($40 a month tops). But I'll take it. Even without the subsidy, I'm still paying less this year than I did in 2009 when I first ERed and took that individual plan before its rates skyrocketed.

I shudder at the thought of the ACA getting repealed and would never, EVER vote for a candidate who advocated getting rid of it (read: Republicans). I now have a pre-existing condition which would surely trigger a big increase in my rates. I'm 53 now and have a long way to go to becoming eligible for Medicare. A big purpose of insurance is to protect you against the possibility one needs it. I was healthy before I became sick (actually, not as healthy as I thought, unfortunately) but I bought insurance for just that reason - in case I DID become sick.

degee: Gosh, I'm so sorry to hear about your health scare. Two weeks in the hospital sounds serious. And oh my gosh, how expensive that would have been without insurance--bankrupting, right? Glad to read that is behind you!

We also got a pleasant surprise this year on insurance, (no, not on premium cost--that of course went up). But they actually expanded the network this year to include another medical group. So now ALL of my doctors are in-network--yay!

Syd, if I had no insurance, it would have cost me about $85k, not enough to bankrupt me, but it would have hurt. However, I would not have been uninsured; I probably would have kept my hospital-only policy which would have covered about about 3/4 of the total and nothing more going forward.

Thanks for the update. Health care is the biggest worry for us as well. We are on my wife's employer sponsored plan right now and it is fine. When she retires in a few years, we'll go with ACA. My mom has a silver plan from ACA and it is working pretty well for her. It's much better than having no health insurance, that's for sure. The cost is increasing very quickly, though. At this point, I'd prefer single payer. Many countries are successful with universal healthcare, I don't understand why the US is so averse to it.

Val and I are both 76 and are lucky enough to live in the UK where we have our National Health Service (NHS). The only problem is that the NHS is practically bankrupting the country with people living longer and more and more sophisticated and costly drugs/procedures becoming available. The NHS is another reason, along with our benefit system, that more and more immigrants are finding their way into our tiny country. Although we are fortunate to be reasonably fit at the moment, we can't imagine what will happen when we can't look after ourselves as the cost of care homes is exorbitant.

It is always helpful to look into your finance and consider your financial options when you are approaching retirement. There are lots of different choices you can make! Ruby http://pendragonequityrelease.co.uk/